ALK-Abelló A/S (ALKB) Earnings Call Transcript

Hello, everyone, and thank you all for joining this presentation of ALK's Q4 results and the outlook for 2023. Let's turn to Slide #2, where I will introduce today's presenters and the agenda. My name is Per Plotnikof, I'm Head of Investor Relations. And with me today are CEO, Carsten Hellmann; and CFO, Soren Jelert. And first, we will bring you up to date on the performance in the fourth quarter an0d the full year as well as sales trends and financials. And then we will provide an update on our strategic priorities with deep dives into North America, China and the pediatric opportunity before we cover the outlook. And as usual, we will end this call with a Q&A session. And to get started, I'll hand over to Carsten on Slide 3, please.

Thanks, Per, and thank you all for joining us today. Let me take you very briefly through a couple of highlights from Q4. Results were in line with the most recent outlook. Q4 revenue was up 12% on growth in all regions and across all product groups. Reported growth in DKK was 14% and the revenue of DKK 1.25 billion was a new all-time high for quarter in ALK. Global tablet sales grew by 14% despite a temporary weakening of the important German AIT market, which Soren will cover in a moment. Non-tablet sales increased by 10%, led by SCIT and Jext and one of the key takeaways from Q3 and from Q4 is that SCIT is well positioned to contribute to growth going forward. Operating profit EBITDA was up 48% to DKK 201 million, driven by top-line growth and efficiencies. Inflationary pressure on margins and costs were manageable. All in all, a strong finish to the year. Let's move to Slide 4 and the full year highlights. 2022 showed organic growth in local currencies of 13% and reported growth in DKK was 15%. EBITDA was up 33% to DKK 708 million, driven by top-line growth, margin expansion and efficiencies and our business proved resilient to inflationary pressures and macroeconomic uncertainties. And we remain on track to deliver long-term sustainable growth and earnings improvement. Strategic progress including the ongoing efforts to broaden AIT prescriber basis and tap into the large pool of untreated patients who are eligible for AIT treatment. In 2022, we estimate that ALK products were used by around 2.4 million patients worldwide and net increase of 300,000 or 14% from 2021. And that was primarily due to new tablet and Jext patients. Despite this progress, we are well aware that we are only touching on the tip of the iceberg and the potential remains huge. We are working harder than ever to spread knowledge about allergy and to educate, promote and facilitate early access to diagnosis and AIT treatment. We continue to work on expanding the market, building prescriber and patient platforms through new channel expansion, digital engagement, disease awareness programs, advocacy for evidence-based medicines and new business models and other activities. 2022 was the 4th consecutive year of strong top-line growth and earnings improvement but there's still so much more we can do to drive progress. We expect 2023 to become the fifth consecutive years of progress, and we expect top-line growth and further earnings expansion, although consistent, will be slightly tougher. We will detail all these later. First, I will hand it over to Soren and Slide 5.

Thanks, Carsten. Let's take a closer look at the market trends in 2022. Let's first look at Europe, where sales were up 10% in fourth quarter and 9% for the full year. This was despite a weakening of the overall AIT market in Germany in the second half of the year, which Carsten just referred to. We believe this weakening was due to a weak tree pollen season, which resulted in fewer patient initiations and a wave of respiratory infections, which crowded out-patients from clinics. We also saw that some prescribers responded slowly to the phasing out of reimbursement for non-registered products. As a result, overall AIT industry sales declined, and this has also had an effect of lowering our tablet sales in quarter 3 and quarter 4 as Germany is our largest tablet market. Nevertheless, ALK gained additional market share in Germany, which we estimate had grown to around 35%, and we are well positioned to expand our market leadership in Germany further as new patients move to evidence-based products and the ongoing changes and competitive dynamics in the market take full effect. North America reported growth of 6% in fourth quarter and 12% for the full year, with growth from all product lines. U.S. tablet sales were still weak due to a long-standing market barrier, while Canadian tablet sales did very well. Revenue from international markets were up 36% in Q4 and 39% on full year basis, powered by a strong growth in both tablet shipments to Japan and shipments to China. Let's take a closer look at the product categories on Slide 6. Growth rates for the tablets portfolio were 14% in fourth quarter and 18% for the full year. All sales regions had double-digit growth and tablets continued to expand their position as a preferred treatment for moderate to severe respiratory energies. Combined SCIT and SLIT drop sales increased 4% in fourth quarter and 3% for the full year. European SCIT sales improved towards the end of the year when sales of minimum products recovered from previous unavailability and sales also benefited from supply issues affecting competitors as well as better pricing. SCIT sales also increased in China and North America. Other products generated growth rates of 37% in 4th quarter and 27% for the full year. This was mainly due to Jext. Jext sales surged 51% in Europe in response to higher demand and supply issues, which impacted other manufacturers. With these solid sales trends, let's turn to the P&L on Slide 7. Full year revenue exceeded DKK 4.5 billion, reflecting a 13% growth in local currencies and 15% growth in DKK while our EBIT margin was up 3 percentage points to 10%. Gross margin improved by 1 percentage point to 62%, reflecting higher sales and improved efficiencies but gains were somewhat offset by higher shipments to Torii in Japan at lower margins. Furthermore, we had a one-off cost of DKK 30 million due to discontinuation of non-strategic products and unplanned facility maintenance. Capacity costs increased 8% in local currencies to DKK 2.3 billion. R&D expenses peaked at DKK 665 million. From 2023, we start to see a slightly lower R&D spend. Sales and marketing costs were up 8% in local currencies as we continue to support growth initiatives, including the build-up in China, preparations for pediatric launches, digital activities and medical events and congresses. We also had costs associated with optimizing our footprint, including closing down in Turkey. Still, despite these cost increases, we managed to further reduce the capacity cost to revenue ratio, as you can see on the second graph. We expect this trend to continue as we increasingly benefit from operational leverage and economies of scale. EBITDA increased by 33% in DKK to 708 million, driven by sales growth, improved gross margins and scale benefits. Finally, free cash flow was positive of DKK 65 million, mainly reflecting higher earnings changes to working capital and higher CapEx investments. All in all, the best results in ALK's history and we are committed to doing even better. Now let's move to the strategy status on Slide 8 and back to Carsten.

Thanks, Soren. We made broad-based progress on all our strategic focus areas, except for the tablets in the U.S. We are on track to become more relevant to people with allergy, extend our global leadership in respiratory allergy and to meet our 2025 financial targets. I'll be detailing North American tablets in a moment, but let me first focus on the 2 other strategic focus areas. On our consumer engagement and new horizons priority, recruitment of patients for the Phase I trial with the peanut tablet is ongoing. Recruitment of adults had taken longer than expected and actions have been taken to minimize delays. We still expect first readout in 2023. On the 2 adrenaline auto-injector projects, development continues towards a planned submission to the U.S. FDA. The exact timing will be determined after feedback from the FDA on our regulatory strategies. And speaking of adrenaline autoinjectors, our partner in China, Grand Pharma has recently obtained its first approval to start selling Jext in the Greater Bay Area in China. Our digital engagement activities continued to gain scale and importance. We have built a suite of apps, websites and tools under the klarify.me banner, and this digital ecosystem helps patients to shorten and simplify their path to AIT treatment. Last year, more than 700,000 unique users found a doctor using our tools and users locked more than 1 million entries about their symptoms. We use machine learning and other technologies to profile the users who are most likely to book a medical consultation so that we can tailor and personalize communication to exactly why the person is in relation to the advancement of the allergic disease. Remember, it's all about being more relevant to people with allergy. Getting a better understanding of triggers that prompt people to take action also help us to improve our dialogue with the health care professionals. More, we can now also observe the first signs of high use of ALK's AIT products with the doctors who are connected to our klarify.me universe. Digital engagement with patients and prescribers is a major competitive advantage. In 2023, we will further expand our tools to take new steps towards a multichannel marketing strategy with the global rollout of a new CRM system. Finally, the optimized for excellence priority efforts are on track to upscale capacity for tablet production and to prepare for the commercial supply of the upcoming adrenaline auto-injectors. We also continued efforts to simplify our production setup and pursued further efficiencies across product supply. Now let's move on to Slide 9 and deeper into North America. As you all know, market uptick of tablets in the U.S. have been hindered due to the slow adoption by allergists, who are financially disincentivized to prescribe our FDA-approved tablet portfolio. To overcome this, we have assessed the business models and recently adjusted the organization to create a platform for long-term success through new prescribers and sales channels. The organization in North America is now structured around 3 business units. The first unit managed our U.S. legacy business and we continue to target growth within SCIT bulk, diagnostics and life science products. The second unit handles the marketing and sales of U.S. tablets to 3 sales channels. The existing allergies business will target region-specific opportunities, mainly in East and West Coast territories where allergists are supportive of tablets so that the allergy business will have the opportunity to grow with higher efficiency. The second one is to build new prescriber groups. We will increasingly focus on pediatricians estimated to treat 4 million AIT-eligible patients. Pediatricians now high have a high flow of younger patients and a good understanding of immunology and allergy. Importantly, though, they are not financially disincentivized to prescribe AIT patients compared to the allergists. Initially, we will also focus on around 2,000 pediatricians who regularly perform allergy test and issue prescriptions for these symptomatic. To address the many AIT-eligible patients who look for help outside of the traditional health care system will establish a new commercial partnership with selected innovators such as retail pharmacies, urgent care clinics and on-demand virtual care providers. Across all 3 channels, our upcoming pediatric and recent adolescent indications, together with the digital engagement programs will support sales. The third business unit is Canada. Canada is well on track to becoming a significant contributor to our global sales growth. Canada is now a fully independent sales and market organization and its capabilities will be expanded. We believe that these changes will strengthen our position in North America, and we continue to target double-digit growth in this region. Please move on to Slide 10. China is well on its way to overtaking France and becoming the world's largest market for house dust mite AIT. House dust mite AIT sales are estimated at more than DKK 1 billion, and the market fundamentals are attractive. 100 million people in China are affected by house dust mite allergy, while just 0.5 million received AIT treatment. To unlock this vast potential, we are ramping up ALK's activities in China. We now have 133 employees on the ground after 64% expansion of the sales force and back-office staff in 2022. We also expanded the number of hospital-based clinics using AIT products by 50% to more than 500, and we accelerated the efforts to train and educate specialists. As a result of all this, our revenue from China was up 62% in 2022. Our ramp-up aims to accelerate the adoption of ALK's existing products and build the market ahead of the launch of the house dust mite tablet. We filed for approval in December, and we just received notice that the authorities have accepted our application for review and that we will commence now. Subject to approval, the tablet should be on the market in 2024-25. We have already made a ACARIZAX available in a special medical zone in China. The first prescriptions have been issued and we expect to gain valuable insights on prescribers and patients in this pilot zone ahead of the nationwide launch. We continue to invest in China and we see China as an important growth driver, short-term and long-term. We expect double-digit growth in 2023 as well. Slide 11, please. Our 2 pivotal Phase III trials in children are on track for completion in 2023. That's MT12, the trial in Europe and North America with the house dust mite tablet and MT06, the trial in Europe and Canada with the 3 tablet. Subject to regulatory approval, the 2 tablets should be available with pediatric indications in Europe and North America in 2024-25. The number of children with uncontrolled respiratory allergists is rising rapidly. Fortunately, there's a growing acceptance by health care professionals that early intervention and controls is crucial to holding the allergies progression to asthma and other comorbidities. These new indications address this need perfectly. Market building activities have started and will be accelerated in 2023. We're especially focused on building a prescriber base among pediatricians. In some countries, for instance, Germany, selected pediatricians are already involved in AIT. We will also increasingly engage with parents and guardians through our digital ecosystem to build awareness and help caregivers understand when they should consult a doctor. From a commercial perspective, this opportunity is compelling. Globally, 10 million children are estimated to live with uncontrolled respiratory allergies. Meanwhile, experience tells us that children are fast track patients needing fewer doctors' visits and adults before being referred to specialists. Once there, the waiting time is also shorter than for adults. And once on treatment, children are much more likely to complete their course of treatment than adults. All of this informs our belief that expanded pediatric and adolescent indications will be key drivers for growing our prescribers and patient bases. And now I will hand it back to Soren and the full year outlook.

Thanks, Carsten. We expect to continue our journey of growth and earnings improvement in 2023. We expect revenue to grow by 7% to 11% in local currencies, which equals 8% to 12% growth disregarding the 1-year mandatory rebate increase in Germany for all prescription drugs. This rebate increase is expected to lower revenue by around DKK 50 million. We expect all sales regions to deliver growth and tablets will remain key to growth. Tablet sales are predicted to increase by up to 15%. Central Europe, Northern Europe, Japan and North America are expected to lead the way through additional market share gains, expansion of prescriber and patient bases as well as increasing influence of the market transition in favor of registered products. As in previous years, some fluctuations in the quarterly tablet sales are anticipated reflecting current market dynamics and phasing of products supplied to partners. In 2023, we expect to see slightly higher growth in the second half of the year than in the first half of the year. The non-tablet portfolio, mainly SCIT and life science products will also contribute to growth. Jext sales are expected to decline slightly after the extraordinary demand in 2022. Also, the number of Jext pens expiring in 2023 is lower than last year. 2024 will be the next year with high replacement rates for Jext. The gross margin will benefit from higher sales and efficiencies, but this impact will somewhat be offset by various factors, modest cost inflation, a German rebate increases, higher shipments to Torii and changes to the product mix. The gross margin is expected to increase by up to 1 percentage points. R&D costs are planned to decline to around DKK 600 million as we start normalizing R&D expenses. Sales and marketing costs are expected to increase but the overall capacity cost to revenue ratio is estimated to further decrease. On this basis, we expect operating profit to further improve to align guidance with our long-term financial ambitions, we have decided to guide on the EBIT margin and the EBIT margin is expected at 13% to 15%, up from 10% in 2022, a margin improvement range between 25% to 45%. All in all, good progress, which takes us further towards the 2025 and 2025 earnings' ambitions. With this, I'll hand you back to Per and Slide 13.

Thank you, Soren, and thank you, Carsten. And this concludes the main part of our presentation, and we will now move to the Q&A session. Operator, please go ahead.

[Operator Instructions] And our first question will come from Thomas Bowers with Danske Bank.

Yes, thank you very much. Thomas Bowers from Danske. So a couple of questions here from my side. So maybe just kicking off with cost inflation. So can you maybe elaborate a little bit on what you mean by actually a modest impact? So is this sort of a percentage point that you assume in your guidance from; so in the vision to what you normally see sort of underlying levels, primarily, of course, referring to potential wage inflation here? And then my second question, just on pricing power. I understand that you have been able to raise prices for some products or these within [indiscernible]. So can you maybe give us a little bit of color on the level of that price hike? And actually, if it has any impact on your 2023 guidance? And maybe also some color on which countries are you referring to here? And should we expect more during the year. So is there any new I mean, this is sort of a consequence of the inflation we have seen that some countries are maybe willing to look at pricing in Europe that could be interesting to get your thoughts on here. And then my final question just for now. So just in regards to Germany, --so just sort of theoretically here, assuming that one of the top 4 or 5 players in Germany starts to experience some product stockouts. Would you actually be able to meet that potential additional demand. So do you actually have sufficient capacity in your SCIT portfolio? Or you also need to go in and try to convert patients to tablets in that case?

I'll start with the pricing in Germany, then Soren will take the cost inflation question. I think pricing power, no inflation, actually, on the contrary, you know that the German government actually mandated a 5% rebate increase in Germany. That's actually why we look at 7% to 11% instead of 8% to 12% as we normally do in our growth. We have on specific products have an opportunity to increase the prices, but it's not a general trend as most of our products, the prices are set by the government, and they're not easing off. So no, it's not something that you can expect that we took that in as a big tailwind to our guidance for 2023, not at all. For Germany, yes, it's true that you saw one company folded a quarter ago, and somebody else has some issues right now. We have the capacity and the willingness to take over as much as the German market as we possibly can and we are trying as hard as we can. I think we talked about it before when we moved on the trend to make sure that only approved registered products could be the ones that you could initiate a new patient with and which is now up to 80% of all payers in Germany that has mandated that, which put pressure on our competition and we are very focused on capturing as many market shares as we can -- which we are actually. I think we are up to more than 35% market share in Germany now, which is also a very high number for us compared to what we had in history. So I think actually, in that respect, even though the market in AIT in general can be [ price pressure ] and so forth. The underlying fundamentals for us in Germany is in our favor, and we're doing good, and we can supply. It's not as easy as said. It is really a conversion from a doctor between patients and so forth. But definitely, we can and we will and we do all possible to win. I think be rest assured of that. With that, would you comment on the cost inflation, Soren?

Yes. Thank you, Thomas, for the question. And it's, of course, clear that the whole notion around inflation has been building up during 2022. So when we provided guidance, of course, also that we gradually have taken this especially wage inflation into considerations. And actually, going back to the third quarter report out already at that point in time, we said that we believed that we will be having a modest wage inflation approach in the company. And as such, we have been sticking to that plan. And we guesstimate that inflation is probably impacting us by 0.5%. And that's a split on wage and of course, also other input costs. But bear in mind also that electricity and gas is now coming down to a reasonable level. And also remember that we claim relatively early on that we are hedged on that also. So that's why the fluctuations there are in good control. So 0.5% on inflation pressure. That's what we are committing to.

Great. And then maybe just a follow-up, if I may, just on Jext. So you're seeing lower Jext sales next year. Is that primarily due to competitor return? Or is it due to the expiration of the pens?

Predominantly exploration and to some extent, competitors coming back, but mostly 2024 will be a good year. I think that's the way we normally say it here. That's when the next ones expire, the big bulk.

Our next question will come from Benjamin Silverstone with ABG Sundal Collier.

Carsten, Soren, Per, thank you for taking my questions. I have 3 if I may. The first one is in regards to the partnerships in the U.S. Just for our understanding, is this something that you see moving the needle, so to speak, in terms of sales in the U.S.? And the second one is regarding China. So you mentioned that the first approval for Grand Pharma were in, in terms of the Jext sales. So wondering if you could just reiterate how, you do see that addressable market from the Grand Pharma partnership and also how the uptick is expected to look like here? And the last question is regarding the dynamics that are currently driving Germany. If you could just give us some indication of how you see the sales in Germany panning out over the foreseeable future? And then also speak a little bit about the dynamics driving it, that would be much appreciated.

Thank you, Benjamin. For the partnership in the U.S., I think I see more like a medium-term to long-term. This is how to build the new challenge. We now got the adolescents approved in the U.S. and we will get the children approval within 1 year to 1.5 years. So this is building up the new channels or to accommodate that. Of course, it's also to just realize that running around visiting allergists in the Midwest of the U.S. didn't pay off. So now we are just refocusing the resources to maximize the output of our investments. We still see a huge potential in the U.S. is a long-term potential. And maybe not all of these partnerships will work out but we definitely know that we're on to something. But don't expect that we find a big red bottom in March and then suddenly you see billions coming in. But definitely, we are very committed to succeed in the U.S., as we have said every year. And you also know we tried many things, not that successful compared to our expectations so far. But the need is there. The products are the best in the world, if they are approved and the potential is there. So we'll keep moving. I think we are also, of course, accumulating learnings, and we're putting all those earnings into play now to not repeat our mistakes. I think that over the next years, you will see results from this and maybe better than we expected. But I'm out of the woods of overpromising, underdelivering on the U.S., let's just keep the hard work in place. For China, it's a matter of Grand Pharma getting the full approval for the full China and reimbursement, that is the key to a large success. You should think about it this way that Grand Pharma already today has about 50% market share on adrenaline, which is today sort of a prepacked syringe or just a syringe what you have to go in. So if you get an anaphylaxis shock, you have to be driven to a hospital or have to be able to sort of sugar out of ampule and get into serene and inject yourself, which is not really likely. So we and they really believe there is a market for this pen in the U.S. even though we are selling it at our sales price to China, they believe also that even if they triple the price to $120 per pen, a lot of people who are subject to having a anaphylaxis for any reasons, including the Army would have these pens in their pockets for $100 keeping them safe for 1.5 years. So they believe in the potential, but there is a process going on. Don't expect that these first sales here are going to be a rapid uptick with a huge upside in 2023. You could always be surprised about China, but I wouldn't put it in my budget right now. But this is definitely a step in the right direction. On Germany, there's been a lot of things moving around in Germany. And personally, I was pretty concerned sort of after summer, if all these notions about inflation, energy price and so forth, that we would see some trade-off of not going and get their treatment and so forth. We did not see that - so we really check that. But what we did see was that the pollen season in Germany was less than normal. We estimate around 10% lower AIT market in general. We did take market share and do okay relatively, but it was a little lower. At the same time, we have also seen there a number of viruses moving around in Germany at the same time. So looked like the patients were ill with other diseases and the doctors were preoccupied by treating a lot of different diseases. So it has been a little troubled market in Germany, not really based on a tablet problem, so to speak, more like a market condition problem. When we look at our projections for Germany, it's going to continue to be a strong market for us. It's not going to be huge numbers. I guess, the next quarter or 2, but it's going to be 10% growth for tablets in Europe in totality, also supported by Germany and we will have 20% plus in North America and 20% plus in Asia for tablets. So I think all in all, these are just small adjustments you will see in a market, but definitely not in our view, fundamental or momentum problem we have in any of the European countries.

Our next question will come from Jesper Ilsoe with Carnegie.

Firstly, a question on the peanut allergy trial where you mentioned in the report and here on the call that there has been some slow recruitment among adults. Perhaps you could give some additional details on when you expect the data? I previously recall that you mentioned data before the summer. When should we expect the data now? And why has there been a slow recruitment? Any color you can add there as well as what mitigating actions you are taking? So what does that mean? And on top on this, so [ Nestle ] has had some issues selling [ portfolios ] are now moving away. Has this decision and the say market development by the competitors have made any change to how you view the market potential in peanut allergy? And then I have the questions afterwards on top.